Date created:22 January 2002
Last modified: 22 January 2002
Maintained by: John Quiggin
John Quiggin

Poverty is such a rich issue

Australian Financial Reviee

31 January 2002

Regular readers of this column will know that my relations with the Centre for Independent Studies have often been strained. It is a pleasant surprise, therefore, to find much to agree with in one of the more controversial reports issued by the Centre, its critique of the study of poverty undertaken by NATSEM on behalf of the Smith Family.

My points of agreement begin with the first half of the report's headline finding that 'inequality increased in the 1990s, but poverty did not.' The increase in inequality, obvious though it is to all, was denied during the 1990s by supporters of the bipartisan program of free-market reform. The second part of the finding, as the report shows, depends crucially on what is meant by 'poverty'.

A second point, emphasised with a breakout in bold type, is that When we take account of the value of things like [publicly funded] education and Medicare, the 'poor' turn out to get a lot more than we first realise. The authors of the report are, rightly, enthusiastic about the benefits of the 'social wage' [consisting of welfare benefits and free public services] which, they observe, has a 'huge impact' on poverty and inequality. This marks a welcome contrast with other free-market commentators, including some of their colleagues at the CIS, who have called for cuts in the social wage.

Admittedly, the authors do not seem enthusiastic about action to reduce poverty and inequality further by increasing the social wage. But, from the CIS, even praise for the status quo is welcome.

A third point is that, for most purposes the median is a better measure of the 'average' outcome than the arithmetic mean. Mean income in the 1990s rose quite rapidly, but median income did not.

The authors focus on the implications of this point for measures of relative poverty. There is, however, a much more direct implication. Most discussion of Australia's economic performance in the 1990s has focused on the reasonably good outcomes in terms of mean income. But, as the CIS notes, our performance on the more relevant measure, median income, has been far less impressive.

The CIS argument centres on the fact that median disposable income in Australia, adjusted for inflation and household composition, rose by just 5.4 per cent between 1990 and 2000. For the average (that is, median) Australian, free-market reform has failed to deliver the goods. When compared to this unimpressive outcome, the poor just about kept up.

Another important point raised by the CIS is that poverty may be temporary. In all societies, there is some 'churning' as, for example, unemployed workers find jobs and move out of poverty. This point was made earlier by the Institute of Public Affairs, which reported, perhaps surprisingly, that such churning was less effective in the United States than in European social democracies (IPA Review December 1999).

The IPA was reporting the work of an Australian-Dutch team, including political philosopher Bob Goodin (.reviewed in The state of welfare at home and abroad, AFR 13/9/01/). The team found that about 6 per cent of Dutch people experience poverty in any given year, but, when income is averaged over a decade, the proportion of poor people falls to 1 per cent. In the United States, about 18 per cent of households are poor in any given year, and averaging over a decade only reduces the proportion to 13 per cent

There is no definite answer to the central issue raised by the CIS critique, that of how to measure poverty. A purely relative definition of poverty yields the obviously unsatisfactory implication that a proportional increase in income for everybody has no effect on poverty. In any case, this makes 'poverty' a synonym for 'inequality'.

On the other hand, as the authors concede, even 'absolute' measures of poverty depend on the ability of income to 'allow social and economic participation consistent with community standards'. These standards inevitably rise with average income levels (though not in a proportional. fashion) An Australian family could provide its children with food, clothing and housing that would be opulent by the standards of an African village, or even by Australian standards of the past, and still risk prosecution for neglect.

On one point, the CIS and the Smith Family are agreed. Whether income is measured in relative or in absolute terms, the group that did really well in the 1990s was the top 5 per cent of households, the people who, in any country but Australia, might be called 'the elite'.

Professor John Quiggin is a Senior Research Fellow of the Australian Research Council, based at the Australian National University and Queensland University of Technology.